Background on Tax Reform

Tax Rates

‘Marginal Tax Rates’ means the amount you pay on each taxable dollar earned above the deductible base.
(Decreasing the marginal rates would decrease the amount everyone pays, but in general would favor those who pay more tax).

The current marginal tax rates are 15% on the first $42,350 of taxable income, 28% on the next $60,000, and 31%, 36%, & 39.6% above that.
(Those are the ‘Married Filing Jointly’ rates. The same marginal rates apply to singles, but at different breakpoints).

The ‘Marriage Penalty’ means that two people filing taxes together pay more than if they filed as two singles separately. This situation has existed in the tax code since 1969, when the tax code was reformed to account for women entering the workplace. The bill referenced above became law in June 2001 as the “Marriage Penalty and Family Tax Relief Act.” It changed tax deductions and child credits to remove that aspect of the ‘Marriage Penalty,’ but did not address the core distinction that a couple filing jointly still pay more than the same couple filing separately.

The most common deduction is the mortgage interest deduction (applicable to everyone who owns a house; it makes buying a home more affordable by subsidizing 15% of the mortgage).

The charitable deduction is the basis for discussions of ‘Faith-based organizations’ replacing government agencies (see Welfare section)

The 'Estate Tax' or 'Inheritance Tax' is called the 'Death Tax' by its opponents, beginning in 2001 under President Bush. While polls indicate broad support for eliminating the estate tax, few Americans are directly affected by it. Opponents point out that some family businesses would have to sold to pay the estate tax. In 2001, 98% of descendants avoid taxes altogether because the first $675,000 of an estate was exempt from taxation. That exemption rose to $5 million in 2011-2012, with a one-year repeal in 2010, and is slated to return to $1 million in 2013. According to the Internal Revenue Service, about 3,000 estates are worth more than $5 million each and hence would be subject to the tax in 2011-2012.

The ‘Capital Gains Tax’ is a separate income tax (with a marginal rate of 20%) which applies when goods that have gone up in value are sold. Lowering the capital gains rate is considered a benefit to wealthier taxpayers.

Flat Tax vs. Progressive Taxation

A 'progressive tax system' means wealthier tax payers have a higher tax rate than lower-earning taxpayers. In contrast, the 'FairTax,' which would replace the current progressive marginal rates with a single 'flat' rate (plans vary from 10% to 17%), applied after a deductible base. Flat Tax plans can achieve lower rates by removing the mortgage interest and charitable deductions.

A ‘Flat Tax’ or ‘FairTax’ would replace the current progressive marginal rates with a single ‘flat’ rate (plans vary from 10% to 17%), applied after a deductible base.

A ‘National Sales Tax’ would replace the income tax with a consumption tax paid when purchasing anything. Many European countries implement a form of sales tax called ‘VAT’, or Value-Added Tax.

The 'AMT' or 'Alternative Minimum Tax' is intended to ensure that high-income earners pay a reasonable tax rate, by imposing a minimum tax rate above a high-income threshold. Since 2013, the minimum rate is 26% for income above $323,000.
Prior to the 2012 reforms, the income cutoff was $51,900, which included many middle-class earners.

Buffett Rule: The current proposal for a new AMT is known as 'the Buffett Rule,' and proposes a minimum rate of 30% for income above $1,000,000. The Buffett Rule is named after Warren Buffett, a billionaire who pointed out that his own marginal tax rate was lower than that of his secretary.

Amendment XVI to the US Constitution

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. (1913)